A collection of often sceptical, always candid observations and insights on the US economy and large-cap equity markets. Readers have observed my style and perspective to be that "the emperor has no clothes," and that is reasonably accurate.
Postings reflect my philosophies and perspectives on economics, business and politics.

Friday, May 28, 2010

George W. Bush's economic adviser, Ed Lazar, was a guest host on CNBC this morning. As part of the discussion, he was forced to tolerate CNBC's resident economic idiot, Steve Liesman.Liesman resembles nothing so much as the young child allowed, for the first time, to join the adult table at a holiday dinner. Because he was on the set with a real economist, Lazar, Liesman got to pretend he is one, as well.Thus, the hapless CNBC reporter earnestly challenged Lazar on the subject of taxes. Liesman, being the typical liberal, equipped to think incorrectly and ignore empirical evidence, insisted that our current federal debt obligations will just have to require more and higher taxes. How else can we ever pay those debts?With a straight face appropriate for a simpleton, Liesman declared that debts this massive require action on 'both sides,' meaning spending restraint and higher taxes. Never mind the evidence that higher taxes depress the economic activity and risk-taking so crucial to job and GDP growth, or that those higher taxes never actually collect the higher revenues anticipated.Liesman wouldn't understand these things because he's not an economist- he's an economic reporter who gets to sit with degreed professional economists and talk as if his comments have equal merit.When will CNBC wake up and fire this dunce?

In this post, written two months ago, I cast doubt on Carol Bartz' ability to turn around the ailing, failing Yahoo.

In my opinion, Bartz' arrival was simply too late to reverse the damage done by Terry Semel and Jerry Yang.

Now, in a recent Wall Street Journal piece, some quantitative data are bearing out that sentiment.

According to a piece in yesterday's Journal, Facebook has now passed Yahoo in terms of "display-ad impressions- the number of times users saw an ad."

Yahoo also trailed overall internet visitor growth this year, 4% to 10%. According to the article, time spent on the site declined by 11%, while page views were down 13%. Both of those measures were positive in double-digits for the overall internet.

With performance metrics like these, it's very difficult to see how Bartz will change Yahoo's fortunes.

The nearby Yahoo-sourced price chart of the S&P500Index and Yahoo for the past year show a dismal picture for shareholders. Yahoo is flat, while the S&P is up over 15%.

Like Palm's recent purchase, for patents, by HP, perhaps it's time for Bartz to find a buyer for the firm she currently heads, and save shareholders even more losses in months and years to come.

The other day, Rick Santelli blasted out a rapid-fire indictment of the Fed concerning inflation and commodities pricing.Essentially, Santelli reminded CNBC viewers that inflation, as Milton Friedman stated, is a monetary phenomenon. It has to do with the quantity of money relative to value in an economy- nothing more, nor less, nor different.Santelli noted that the Fed is now pointing to falling commodity prices and claiming deflation is a risk, and inflation has been tamed!Not so, says Mr. Santelli. And he's entirely correct.He contends that two administrations, Congress and the Fed, having debauched our dollar by printing, borrowing and spending money the US does not have, have sowed the seeds of imminent inflation.To escape notice of this, the federal government is pointing to the fall in prices of various goods- housing, metals, oil- and claiming victory over inflation, as Santelli contends. And possible deflation, to boot, thus providing cover for the near-zero interest rates.Of many pundits on CNBC, Santelli is the only one to my knowledge to have pointed out this clever obfuscation by the Fed regarding inflation, monetary profligacy, and commodity prices.

Thursday, May 27, 2010

A hard-to-notice, easily overlooked section of the Wall Street Journal's editorial page is its "Notable & Quotable" feature.The other day, the section reprinted this exchange from a Spiegel Online interview with former Bundesbank head Karl Otto Pohl,"Pohl: The foundation of the euro has fundamentally changed as a result of the decision by euro-zone governments to transform themselves into a transfer union. That is a violation of every rule. In the treaties governing the functioning of the European Union, it explicitly states that no country is liable for the debts of any other. But what we are doing right now, is exactly that. Added to this is the fact that, against all its vows, and against an explicit ban within its own constitution, the European Central Bank (ECB) has become involved in financing states. Obviously, all of that will have an impact. . . . The European Union should have declared half a year ago—or even earlier—that Greek debt needed restructuring.

Spiegel: But according to Chancellor Angela Merkel, that would have led to a domino effect, with repercussions for other European states facing debt crises of their own.

Pöhl: I do not believe that. I think it was about something altogether different. . . .

It was about protecting German banks, but especially the French banks, from debt write offs. On the day that the rescue package was agreed on, shares of French banks rose by up to 24 percent. Looking at that, you can see what this was really about—namely, rescuing the banks and the rich Greeks."Given my comments about the Euro in this recent post, I found Pohl's comments very insightful and sensible.Sad to say, you tend to trust ex-officials to be more candid and honest than the ones in power. Pohl didn't actually judge Merkel, but he did not shrink from explicitly disagreeing with Merkel's alleged reasons for the Greek bailout by Germany.While the excerpt doesn't cover Pohl's thoughts on the future for the Euro or the EC, I can't help but wonder what responses to those questions would have been.When Pohl says "obviously, it will have an impact," one senses he may mean economic, financial and political.Sounds about right to me.

Am I alone, shaking in fear as I hear our naive Treasury Secretary, Tim Geithner, babbling about economics while abroad in China earlier this week?After much hoopla surrounding his visit, I heard part of an interview with him on CNBC. Asked about China's insatiable appetite for raw materials, and its potential affects on the US, Geithner chirped about how great it was that China is an important, large global economic power. How wonderful that they, too, have a growing demand for basic commodity metals and energy.Huh?What's our chief tax cheat been smoking lately?Of course, it's true that Geithner's claims to fame have mostly been as a governmental-entity-employed financial systems plumber.Faced with a real crisis at the New York Fed two years ago, Geithnerblinked in negotiations with the French and, in contravention of normal bankruptcy law, promptly paid off AIG's derivatives creditors in full.An economic sage Geithner is not. What he's doing spreading economic falsehoods is anybody's guess. But last time I checked, US consumers would benefit by less demand for commodities, not more, as that would allow prices to drift lower, not higher.Yesterday morning, Geithner was already in Europe, making inane comments about the Eurozone's situation.I can't wait for this idiot to get home and hide out somewhere where he won't embarrass himself or the American people.

Wednesday, May 26, 2010

The headline piece in the Marketplace section is "Microsoft CEO Takes Over Gadget Unit," while Holman Jenkins, Jr.'s editorial is titled, "Apple's Second Date with History."

In the Marketplace article, Nick Wingfield discusses the troubles Microsoft has had since its initial splash with XBox. Two key senior managers are retiring, and Ballmer is now taking over the entertainment and communications devices units. He writes,

"Microsoft's problem hasn't been that it was late to the consumer-device market. Michael Garternberg, an analyst at advisory firm Altimeter Group, said Microsoft missed important consumer trends by focusing on its core business markets.

The shifting fortunes could be underscored in the coming weeks by a changing-of-the-guard in market capitalization. While Microsoft has long been the tech industry's most highly valued company, a little more than $6 billion now separates its $229 billion stock market value from Apple's."

Wingfield quotes an academic attributing the difference to higher consumer spending growth versus that for business IT products and services.

Personally, I think that academic got the cart before the horse, in the sense that the real difference between the firms has to do with pursuing commodity markets instead of product/markets which reward better design and functionality.

Holman Jenkins begins his editorial noting how Apple had a near-death experience many years ago, only to be rescued by the internet. Jenkins, too, discusses how Microsoft competed in operating systems, which became commoditized, while Apple went off in a different direction, specializing in digital devices for specific applications.

Jenkins believes Apple, through its closed systems for the iPod and iPhone, risks another brush with death, as Google's Android cell phone operating system challenges it for supremacy. He ends his piece contending,

"Apple this time understands (we hope) that it isn't playing for all the marbles, but can build a very nice business on just those customers who crave a premium service tightly controlled by the wonderful Mr. Jobs, even if it means paying a bit more and forgoing access to a lot of Web goodies that might not work so well in favor of a smaller number that work really well.

Still, we'd rather be Google. Why? Because Google can fail at everything but as long as it keeps its search box at the center of our digital lives, the ad gusher will continue to flow."

Jenkins' parting comment led me to construct the nearby Yahoo-sourced price chart for Apple, Google, Microsoft and the S&P500 Index for the past five years.

Sorry, Holman, but I'd bet on Apple. And actually have, as it's been a frequent member of my recent equity strategy portfolio selections, whereas Microsoft has not for a decade, and Google has not, if at all, for quite some time.

The price chart confirms what I suspected. That is, Apple's highly-focused, niche strategies have given its shareholders better returns over time, with Google already falling back to earth, and the now-hapless, gargantuan Microsoft lumbering along near the S&P's return.

I think quite highly of Mr. Jenkins, but on this topic, I have to respectfully part company with him.

In my humble opinion, as a trained marketing professional, both Messrs. Wingfield and Jenkins miss the key point about Apple's strategy versus Microsoft and Google.

Jenkins actually mentions that Apple chose to forsake the open operating systems world, and focus on niche digital devices. But he fails to understand the key benefit of that choice.

I believe it is this. Both Microsoft and Google became dominant in large markets, which, though providing for rapid early growth, have made it difficult to sustain such growth. Whether it's operating systems and basic office productivity software or online ad revenue from free search, both companies have saturated those markets and must look to higher-cost, more challenging new businesses for growth.

Apple, by contrast, chose to pursue specific consumer need satisfaction with a family of specialized digital devices. Steve Jobs has a flair for design, packaging and promotion of these devices.

Truth be told, over time, the product/market segment Jobs chose provides for better product margins and higher barriers to entry. Note how Microsoft has become loathed for its poorly-designed, patch-heavy operating systems. It's an open secret that many users still run XP and older Office packages. Including me.

Google has even forced Microsoft to include net-based Office applications in their recent product version. Meanwhile, Bing competes with Google's search, and everybody is looking at proprietary online or cell-based ad systems.

The lesson here seems, at least to me, to be obvious. Mr. Jenkins' appetite for market size notwithstanding, I'll take consistently superior total returns every time. And as long as Steve Jobs continues to run Apple, that's probably what you'll get.

The nearby price chart for the same entities, from 1985, clearly shows Microsoft flattening by the dawn of this decade. Apple declined after the dot-com bust, then rocketed forward on the i-series products and services. Google, from its inception, only matched Apple's returns.

After Jobs, le deluge. No argument there. But Microsoft crested while Gates was still there, and Google's very wide-open business model, while initially capturing huge profits as the first-mover, is now having some difficulty continuing that early growth.

I see Schumpeter's theory at work in this picture. Apple re-invents itself in a technological space far faster and more successfully, profitably, than either of its putative rivals.

With large markets tends to come commoditization and earlier end to superior growth and returns. The case of Apple, Microsoft and Google bears that out once again.

TARP Oversight panel chief scold Elizabeth Warren was on CNBC, yet again, this morning.For the very first time, she actually had something positive to say, and came really close to fingering two culprits responsible for some of the financial problems of 2008 and their aftermath.Self-identifying as a bankruptcy law professor, Warren asserted that there are two fundamental principles in that discipline- equity owners take losses first, to exhaustion, if necessary, followed by creditors taking a haircut on their claims.She noted that in AIG's case, neither occurred.I found this to be atypically lucid and useful, for which Warren should be commended.Then she proceeded to drop the ball. For the next few minutes, she nattered on about how the New York Fed had claimed that they either had to let AIG fail, and, thus, the US economy, or pay creditors in full. No other option existed. This would speak to Warren's second bankruptcy principle.To anyone familiar with the publicly reported facts, there is one person, and one person alone, to whom Warren and her TARP oversight colleagues can turn to probe this curious situation- current Treasury Secretary Tim Geithner. (For more on the tax-cheat-in-chief's role in the AIG affair, search my posts with the label 'Geithner.')But instead of stating this, and either castigating Geithner for his actions, or promising to (re?)call him to testify for the panel, she immediately began pulling other names out of the air, like Bob Willumstad.Could Warren be skipping over Geithner because she was appointed by a Democratic Congress and, thus, knows better than to implicate one of their own, the administration's Treasury Secretary? That's certainly how it looks.Warren also stated that AIGshareowners are still trading their equity, which should not have occurred under bankruptcy law.Well, for that, we have Congress to thank, do we not? Because Congress authorized the TARP, and then-Treasury Secretary Paulson to do whatever he thought necessary. And I believe he was responsible for choosing to rescue AIG in the fashion that left it largely government-owned.Why doesn't Warren probe the reasons why Paulson and Congress chose to simply disregard bankruptcy law and arrange bespoke bailouts?In the one area in which Warren would seem to have applicable expertise, bankruptcy, all she seems to be doing is warning that it's a bad idea to let financial firms know they may get rescued.She spent considerable time at the end of her CNBC appearance warning that it is dangerous to let firms believe they will be, once again, rescued by the federal government. She also offered that the just-passed financial regulatory bill should be continued to be modified as time goes by.Aren't you glad Liz thought of those two ideas? Because nobody else has.Seriously, we don't need Warren to lecture us on what a bad idea the entire TARP/bailout idea was, nor that regulatory law shouldn't be passed as a work in progress. Being naive about financial services, Warren completely missed the obvious, i.e., capital flows will be affected by current legislation, not some unknown, hoped-for future fixes in a bad law about to be passed and signed.Well, thank God for small favors. At least, for once, Warren actually used her legal background to come close to identifying the guilty parties in the TARP fiasco.

Tuesday, May 25, 2010

I heard a quote attributed to Milton Friedman last week regarding the Euro.Friedman allegedly predicted that the currency would collapse with its first financial crisis. After considerable reading, reflection and discussions with well-informed, learned colleagues, I find myself in agreement.I wrote here recently that Doug Dachille crystallized for me some misgivings I've had since the beginning of the Euro. Dachille's viewpoint was echoed as I spoke with a very experienced retired CEO this past weekend.With some added days' perspective since last week's continued turmoil over the Euro, and the prior week's ECB actions, it continues to be difficult to see how the Eurozone countries can grow their way out of this fiscal mess.And it is a fiscal mess. Recall that the origin was a rather quiet disclosure months ago that the prior Greek government simply lied about its budgets and deficits.I won't reiterate my and others' comments on the quasi-socialist, slow-growth economies of the EU, the transfer of wealth from Northern European nations to Southern ones, and the inevitable stress on fiscal policies, savings, taxes and long term Eurozone growth. It's enough to note that, once the immediate bailout/crisis mode has passed, the EU will continue to live with economic problems associated with funding the Greek and other national rescues.The trouble may well bring down Angela Merkel's government in time. At that point, you have an opening for the previously unthinkable- German withdrawal from the Euro and its return to the DeutschMark.Just because this won't all happen this next month or this summer doesn't mean pressure isn't building for a radical, discontinuous resolution of the simmering Euro problem. It's ultimately a cultural clash- robust, harder-working Northern European economies rescuing more spendthrift Southern European economies.These nations have hundreds of years of experience as independent nations with independent fiscal policies. It's hard to believe they will move closer to surrendering those differing fiscal policies to a single, more powerful Brussels-based EU government. Thus, with the status quo probably untenable, the other extreme becomes more believable- the end of the Euro.

Monday, May 24, 2010

Several pieces of information or opinion I received over the weekend leave me with the clear sense that the recent, sudden slide in US equity market prices is very clearly attributable to actions of governments around the world. As such, what governments, including Germany, the Euro community, and the US Congress and Fed have done is effectively inject fear and uncertainty into investors in global capital markets.For example, PIMCO executive Mohamed El-Erian penned an opinion piece in the weekend Wall Street Journal discussing the return of the "nervous weekend."Referring, originally, to US government weekend triage actions in the fall of 2008, now it's European governmental entities providing the stream of market-roiling actions.Among El-Erian's observations were,"I fear that markets may not get sufficiently reassuring answers any time soon to these questions.There is still a deep hesitancy among European policy makers to acknowledge that the approach to rescuing Greece is incomplete. But few outside observers are fooled by a strategy that results in a further increase of the country's already excessive debt-to-GDP ratio, relies too heavily on a blunt and draconian fiscal policy instrument, and sustains a debt overhang that will deter new investments and amplify an already painful drop in GDP.The bottom line is simple yet consequential: The disruption in financial markets is not a garden-variety market fluctuation. Instead, it's an over-due recognition that the global economy faces an uncertain future that involves slower growth and greater government regulation."In another Journal editorial, columnist Jason Zweig focused on professional investor Seth Klarman's recent comments in an interview he gave to Zweig at the CFAInstitute's annual meeting. Among the remarks attributed to Karman were,"The government is now in the business of giving bad advice. By holding interest rates at zero, the government is basically tricking the population into going long on just about every kind of security except cash, at the price of almost certainly not getting an adequate return for the risks they are running. People can't stand earning 0% on their money, so the government is forcing everyone to speculate.All we got out of this crisis was a Really Bad Couple of Weeks mentality.I am more worried about the world, more broadly, than I ever have been in my career.Will money be worth anything if governments keep intervening anytime there's a crisis to prop things up?"And, finally,"Sometimes, when you can't figure out a good defense, the best thing to do is to go on offense."Finally, the US Senate passed a dysfunctional, horrible financial regulatory so-called 'reform' bill authored chiefly by a retiring Chris Dodd, who is beating a hasty path home to Connecticut ahead of corruption charges over his sweetheart mortgage deals from now-defunct Countrywide.New Hampshire GOP Senator Judd Gregg, also retiring, but for different reasons, contended this morning on CNBC that this bill is a knee-jerk reaction to show voters that Senators will punish "Wall Street."He ticked off a number of serious flaws in the bill, and noted that, surprisingly, House financial committee chairman Barney Frank actually has a Senate bill further to his left than to his right.Take all of the actions these three people have noted, together, and you have a heretofore rising, low-volatility US equity market turned upside down in just a little over three weeks.When governments lie about their finances, e.g., Greece, and then attempt to duck responsibility and consequences, followed by uncoordinated fiscal policies among the Euro's members, and the US Congress adds to fears with bad legislation, global investors are rightly concerned.In fact, my volatility measure, which is calculated differently from, but tends to track the VIX, has hit recent highs in the past week.Count me among those who believe this equity market swoon is by no means over, nor is fear out of the equity markets by a long shot.

About Me

A well-educated veteran of US corporate strategy positions & hedge fund management, as well as research, product development and project work in consulting, strategy and equity management. Academic background in marketing, strategy, statistics and economics.
Currently own Performance Research Associates, LLC, through which I am involved in proprietary equity and equity options investment management.